NEW YORK: Yields on longer-dated US Treasuries slid on Friday after the benchmark 10-year note breached 1.7% overnight, while key market gauges of rising consumer prices kept pressing higher on concerns about inflation.
The yield on 10-year Treasury notes was down 1.6 basis points to 1.659% after rising to a five-month high of 1.7064% late Thursday. The five-year, US break-even inflation rate breached 3% in early trading, then slid.
The market in several weeks, if not sooner, will test the year's high hit March 30 of 1.776% on the 10-year Treasury, said Tom di Galoma, managing director at Seaport Global Holdings.
"If we get through that, all bets are off we're not going to see higher rates," di Galoma said. "Then we'll probably see 2% pretty quickly." Rates are rising worldwide on a global supply crunch of semiconductor chips for the automotive industry, di Galoma said. The 10-year UK break-even rate hit a 25-year high of 4.29% earlier on Friday, he said. US business activity increased solidly in October, suggesting growth picked up as COVID-19 infections subsided, though labor and raw material shortages held back manufacturing, IHS Markit said in its flash US Composite PMI Output Index.
With supply constraints showing no signs of abating, services businesses reported paying higher prices for inputs, supporting views that inflation was unlikely as transitory as has been argued by Federal Reserve Chair Jerome Powell.
Powell said in a virtual appearance on Friday that the Fed is "on track" to begin reducing its asset purchases and that he expects inflation to abate next year as COVID pressures fade.
Brian Levitt, global market strategist at Invesco, said in a note that he was no longer in inflation denial and that he expects inflationary pressure to moderate over time, but the risks to the economy of higher prices are elevated.
The yield on the 30-year Treasury bond was down 3.6 basis points to 2.092%. A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 118.9 basis points.
The gap flattened in its biggest contraction since July 19, according to Refinitiv data. The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 3.2 basis points at 0.468%.
The break-even rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.913%, after closing at 2.894% on Thursday, a year-high. The 10-year TIPS break-even rate was last at 2.647%, indicating the market sees inflation averaging about 2.7% a year for the next decade.
The US dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.580%.
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